Putnam sale could hinge on incentives

Bids expected to rely on performance measures, with less cash up front

By

MurrayColeman

SAN FRANCISCO (MarketWatch) -- Expected bids for mutual-fund giant Putnam Investments will likely vary widely, both in price and terms. But a provision of any deal could be a so-called earn-out, involving an initial cash payment with the remainder tied to future performance and asset growth, industry analysts say.

Such arrangements often underscore mergers between small asset managers, but aren't typical with firms of Putnam's size.

"It's a very common structure for deals between smaller shops," Rachel Barnard, a Morningstar analyst, said. "But we haven't seen it used as much in larger deals for asset managers like Putnam."

Marsh & McLennan Cos. Inc.
MMC, +0.56%
parent of Boston-based Putnam, might not have much choice, though an earn-out ultimately could work to its advantage, Barnard said.

"Marsh is trying to unload an underperforming asset manager which hasn't been able to raise its profitability," Barnard said. "In that scenario, an earn-out deal makes a lot of sense. If Putnam keeps improving, everyone wins."

Another reason for Marsh & McLennan to accept a bid heavy on incentives might be to keep Putnam's key personnel energized, says John Casey, chairman of Casey, Quirk & Associates and a veteran fund industry consultant.

"Putnam needs the freedom to do what's right for their shareholders over the long term," he said.

The firm is not the size it once was, Casey added. "So they've probably already cut-out most of their operating inefficiencies," he said. "Someone's not going to be able to come in and build profits simply by cutting costs."

Keeping and attracting talented money managers will be at the heart of Putnam's continued turnaround, he noted. Accordingly, Casey says any new deal must avoid a clash of cultures.

At least three serious bidders for Putnam have reportedly surfaced, with possible valuations of a deal for Putnam and its $187 billion in assets ranging from around $3 billion to as much as $6 billion. See full story.

"By and large, the names that've been mentioned are asset managers, not consolidators," he said. "That means they should be inclined to let Putnam alone."

A key to making sure Putnam's fund shareholders receive a fair shake in any potential deal, Casey says, is John Hill. He's chairman of the fund company's board that oversees management of Putnam's funds and approves contracts regarding how assets are run.

"The board represents fund shareholders and is very independent," Casey said. "That means if Hill sees a problem with any potential deal, Marsh & McLennan will have to listen. He holds a very big stick in this whole process."

If Marsh and Putnam part

Analysts watching Putnam are circling Dec. 7 on their calendars.

That's when Marsh & McLennan is set to hold an investor conference for money managers and stock analysts to discuss the financial giant's strategies and goals.

This would be the first such meeting in several years for Marsh & McLennan. Adding to the allure will be expectations of news regarding Putnam.

"If there's going to be an announcement of a winning bid, Dec. 7 would probably be the earliest possible date," Meyer Shields, an analyst at Stifel Nicolaus & Co. Inc., said in a telephone interview on Tuesday.

Shares of Marsh & McLennan have soared more than 30% since its early August bottom. Shields credits most of that gain to buyers' expectations that Putnam's problems will soon be a part of the insurance conglomerate's past.

"Expectations that Marsh can pay down debt and focus on more core parts of their business are bigger catalysts for their stock's recent improvement than anything fundamentally taking place at the company," Shields said.

If an announcement comes at the early December meeting that Marsh & McLennan has decided to keep Putnam, Shields said he believes stock traders will be upset. "But if word comes that a deal just hasn't closed because more time is needed," he added, "then the market will be much more understanding."

Not everyone agrees that unloading Putnam would be a good move for Marsh & McLennan shareholders. Some analysts point out that a wounded asset manager is worth much less than one that has rebounded. They contend that Putnam is showing signs of improvement.

A new owner would enable Putnam to start a new chapter, said Robert Maltbie, managing director at Singular Research Inc. His firm provides stock market reports to 20 mutual-fund and institutional investment shops.

"It would allow them to bury past scandals and move on," Maltbie said. "It would give them a way to market their funds with a new sense of purpose and hope."

But investors like Bob Mecca probably won't be jumping at any revamping of Putnam in the near-term. The Chicago-area adviser says he'll wait for definitive signs of a turnaround before recommending Putnam funds to his high net-worth clients.

"So many other funds are out there, why do it until you're sure?" Mecca said. "Putnam is going to have to really prove itself before I'll risk my clients' money, both in terms of performance and integrity."

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